Funds, index funds and ETFs, explained

Most people who invest don't buy individual company shares one by one. Instead they buy a fund — a single pot that pools lots of investors' money and holds many investments at once. Buy one unit of the fund and you own a tiny slice of everything inside it. This is general education, not advice.

Active vs index funds

In an actively managed fund, a manager picks which investments to hold, trying to do better than the market. An index fund does something simpler: it just tracks a market index (say, a global shares index) by holding the companies in it. Because there's no stock-picking, index funds usually cost less to run — but their value still rises and falls with the market.

What an ETF is

An ETF — Exchange-Traded Fund — is a fund that trades on a stock exchange like a share, so its price moves through the day. Many ETFs track an index too. The main practical differences from a traditional index fund are how and when you buy it and how the price is quoted; the underlying idea (own a basket in one go) is the same. Value can go down as well as up.

Reading the cost: the OCF

Funds carry a running cost, usually shown as the OCF — the Ongoing Charges Figure, a yearly percentage of what you hold, taken from the fund rather than billed to you. A lower OCF means less of your money goes on charges. It's one of the few investing numbers that's known in advance, which is why it's worth understanding.

This lesson explains what these things are, not which to choose — that depends on your goals and circumstances, and this is general information rather than a recommendation of any specific fund or provider.